TTNDF - Techtronic Industries: Watch Share Repurchases And 2024 Outlook (Rating Upgrade)

2024-01-19 17:03:19 ET

Summary

• Techtronic Industries Company Limited has bought back one million of its shares in recent months, which I think has favorable read-throughs relating to its valuations and cash flow.
• Techtronic Industries is expected to perform better in 2024 as compared to 2023, with growth drivers such as rate cuts and channel destocking this year.
• I upgrade my rating for Techtronic Industries to a Buy following a review of the company's financial prospects for 2024 and its recent share buybacks.

Elevator Pitch

Techtronic Industries Company Limited (TTNDF, TTNDY ) [669:HK] is rated as a Buy.

In my prior October 16, 2023 write-up , I highlighted TTNDY's channel inventory situation and the mid-term top line growth expectations for its Milwaukee power tool business. My focus is on Techtronic Industries' recent share repurchases and its 2024 outlook in the current article.

I have raised my investment rating for Techtronic Industries from a Hold earlier to a Buy now. The company's decision to resume buybacks offers positive read-throughs regarding its free cash flow ("FCF") generation and valuations. TTNDY's FY 2024 financial prospects are also good, taking into account multiple factors such as potential rate cuts and the company's progress with channel destocking.

Readers can trade in Techtronic Industries' shares on the Over-The-Counter market and the Hong Kong market. Techtronic Industries' OTC shares had a mean daily trading value of about $1 million (source: S&P Capital IQ ) for the past 10 trading days. In comparison, the 10-day average daily trading value for the company's shares listed on the Hong Kong Stock Exchange was roughly $40 million. Investors can deal in the company's Hong Kong-listed shares with U.S. brokers like Interactive Brokers.

Recent Share Repurchases Send Positive Signals

Techtronic Industries recently released an announcement on January 16, 2024 noting that the company repurchased 500,000 of its own Hong Kong-listed shares in the January 4-5, 2024, time frame. Earlier, the company also bought back 0.5 million shares between October 18 and October 19 last year.

The one million shares bought back in October 2023 and early January 2024 represented 0.055% of the company's shares outstanding. Techtronic Industries' recent share buybacks are significant because the company hasn't done any share repurchases for more than four years in the January 5, 2019 to October 17, 2023 time period.

In my view, there are two positive read-throughs from Techtronic Industries' resumption of share buybacks.

One positive read-through is that the company's latest share repurchases might indicate that the stock is undervalued.

Techtronic Industries' share buybacks in early January this year were done in the HK$86-88 range. As a comparison, the last done share price of Techtronic Industries' Hong Kong-listed shares as of January 17, 2024 was slightly lower at HK$83.50.

The market is currently valuing Techtronic Industries at consensus next twelve months' EV/EBITDA and normalized P/E multiples of 12.7 times and 18.5 times, respectively, as per S&P Capital IQ data. The company's shares appear to be trading at a discount to fair value based on a comparison of its historical average valuation multiples and its projected earnings growth rates.

Techtronic Industries' historical five-year mean consensus next twelve months' EV/EBITDA and normalized P/E metrics were 15.8 times and 22.4 times (source: S&P Capital IQ ), respectively. Also, the stock's operating (12.7 times EV/EBITDA) and net earnings (18.5 times normalized P/E) multiples are below their respective consensus growth rates. The sell-side analysts see Techtronic Industries delivering an EBITDA CAGR of +14.5% and a normalized EPS CAGR of +19.2% for the FY 2023-2025 time frame based on data obtained from S&P Capital IQ .

The other positive read-through is that Techtronic Industries' move to buy back its own shares again could suggest that the company has a favorable view of its future free cash flow generation. Strong free cash flow translates into an increase in the amount of excess capital that can be potentially returned to shareholders in the form of buybacks.

Techtronic Industries reports the company's financial results on an semi-annual basis and hosts its earnings calls twice every year. At its 1H 2023 earnings briefing in August last year, TTNDY emphasized that it is "well positioned to continue to generate strong free cash flows" for 2H 2023. Techtronic Industries subsequently provided a business update on October 23, 2023 mentioning that the company is "well on track to meet our internal target of" growing its free cash flow from $329 million in FY 2022 to almost $1 billion for FY 2023.

In summary, Techtronic Industries' latest buybacks could potentially signal that the company is expected to achieve significant free cash flow growth and that the stock's valuations are sufficiently attractive.

2024 Business Outlook Is Favorable

The market expects Techtronic Industries to achieve a faster pace of top line expansion and strong bottom line growth. In specific terms, TTNDY's revenue growth is projected to accelerate from +2.0% (estimate) for FY 2023 to +7.5% in FY 2024 as per S&P Capital IQ consensus data. The analysts also forecast that Techtronic Industries can potentially turn around from a -10.4% (estimate) normalized EPS decline last year to record a +19.3% increase in its adjusted core earnings this year.

I am of the view that the consensus FY 2024 financial estimates for Techtronic Industries are realistic for three reasons.

Firstly, potential rate cuts this year are likely to have a positive impact on TTNDY.

A recent January 16, 2024 research report (not publicly available) published by Goldman Sachs ( GS ) titled "Cuts Are Coming" outlined the bank's opinion that the Fed will "start easing in March, with a total of 5 cuts" in the current year, considering that "the 3-month annualized (inflation) rate has slowed further to 2.0%" in December 2023.

It is reasonable to assume that demand for Techtronic Industries' consumer power tools will be boosted by better prospects for the property market driven by lower interest rates. On the other hand, the company's industrial power tool sales are also likely to increase, as businesses spend more on capital expenditures in view of more favorable financing costs.

Secondly, there are indications that Techtronic Industries' channel destocking plans are progressing well.

In its most recent October 23, 2023 business update disclosure, TTNDY revealed that the company is continuing with "inventory reduction initiatives" and "improvements in working capital management."

Thirdly, US elections in 2024 are likely to provide support for infrastructure investments.

The American Institute of Architects or AIA is projecting close to a +6% increase in construction spending for the current year, which will be a growth driver for Techtronic Industries' industrial power tools business.

In a nutshell, I have a positive opinion of Techtronic Industries' financial prospects for the current year.

Final Thoughts

My view is that Techtronic Industries Company Limited is well-positioned to register a good set of results for 2024. The company's latest buybacks also suggest that the stock's valuations are appealing. These factors mentioned above have made me turn bullish on Techtronic Industries.

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